In July, Pensions Minister Steve Webb said he would use the Pensions Bill to reform the amount of state pension people receive if they defer taking the benefit. At present people who choose to defer receipt of their state pension see their payments rise 10% for every year they delay but the government plan to cut the generosity of the increase in half.
Chris Noon, Partner at Hymans Robertson comments: “At present people who choose to defer receipt of their state pension see their payments rise 10% for every year they delay. If the benefit of deferring state pension receipt falls to around 5% as indicated by the Minister then a large percentage of these people will choose to take their pension as soon as they are eligible. Given the significance of state pension to overall government finances this may not be good news for the national deficit.
“Under the current system, those people entitled to the current basic state pension of £107pw who defer taking their benefits by just a year can expect to receive an additional £579 per annum for the remainder of their retirement. Over twenty years the value of deferring for just twelve months adds up to £11,575. If the uplift falls to 5% however, the equivalent benefit falls to £289 and pensioners could lose out on £5,782 over twenty years. The comparable loss for 5 years deferral is £28,933.
“In the current low interest rate environment there is justification for the change as the 10% uplift was introduced in April 2005 when the base rate was 4.75% and the government was then able to generate enough interest from those people who deferred to cover the cost. Today however, the gap between the 0.5% base rate and the 10% uplift has grown too large, even after allowing for longevity. The danger of reforming deferral now is that by the time changes come into force, interest rates may well be on the rise again and the state pension may lose some of its value for those who can afford to delay taking it.”
The tables above add further detail, showing the current additional pension available weekly and yearly as a result of deferral (1.1) based on a 10% uplift and the projected additional pension available (1.2) based on a 5% uplift, as proposed by Pensions Minister Steve Webb. The tables also give an indication as to how much extra pension a person deferring is likely to gain over time frames of 5, 10, 15 and 20 years into their retirement.
This assessment is based on the assumptions used by the DWP in their document “State Pension Deferral – your guide (April 2012).”
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